This paper deals with the adjustment of commercial lease transactions for
the purposes of Non-Domestic Revaluation and seeks to promote
consistency of approach between Land & Property Services (LPS); Valuation
Office Agency (VOA GB), Scottish Assessors Association (SAA) and the
Valuation Office Ireland (VO Ireland).

1.2

The objective of rental adjustment, within the context of a general
revaluation, is to convert rental evidence into a form which is compatible with
the appropriate statutory definition of rateable value.

1.3

The factors for which adjustment of rental evidence may be required, and the
way in which the adjustments should be made, are often a matter of
professional judgement. For this reason it is not possible to prescribe
precisely how adjustment and analysis should be carried out in every
instance. The general guidance given here is not intended to provide
specific answers to particular local problems which will be covered, as
necessary, by appropriate local instructions.

1.4

It should be noted in particular that rental adjustment for the purposes of non
domestic valuation in England and Wales is necessarily conditioned by the
terms of the Landlord Tenant Act 1954 and Rating (Valuation) Act 1999,
neither of which apply in Northern Ireland, Scotland or the Republic of
Ireland.

Definitions of Rateable Value
England and Wales
1.5

All non domestic properties are required to be valued on the basis of
rateable value which is defined in Schedule 6, Paragraph 2(1) of the Local
Government Finance Act 1988 as:
“The rateable value of a non-domestic hereditament none of which
consists of domestic property and none of which is exempt from local
non-domestic rating shall be taken to be an amount equal to the rent at
which it is estimated the hereditament might reasonably be expected to
let from year to year on these three assumptions:
i.

the first assumption is that the tenancy begins on the day by
reference to which the determination is made;

ii.

the second assumption is that immediately before the tenancy
begins the hereditament is in a state of reasonable repair, but
Steering Committee on Harmonisation (Practice & Procedure)
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excluding from this assumption any repairs which a reasonable
landlord would consider uneconomic;
iii.

the third assumption is that the tenant undertakes to pay all usual
tenants rates and taxes and to bear the costs of repairs and
insurance and the other expenses (if any) necessary to maintain
the hereditament in a state to command the rent mentioned
above.”

Scotland
1.6

The definition of net annual value is contained within the Valuation and
Rating (Scotland) Act 1956, Section 6(8), as follows:
“the net annual value of any lands and heritages shall be the rent at
which the lands and heritages might reasonably be expected to let
from year to year if no grassum or consideration other than the rent
were payable in respect of the lease and if the tenant undertook to pay
all rates and to bear the cost of repairs and insurance and other
expenses, if any, necessary to maintain the lands and heritages in a
state to command that rent.”

Northern Ireland
1.7

The definition of net annual value is contained within The Rates (Northern
Ireland) Order 1977, Schedule 12 as:
“The rent for which, one year with another, the hereditament might, in
its actual state, be reasonably expected to let from year to year, the
probable annual average cost of repairs insurance and other expenses
(if any) necessary to maintain the hereditament in its actual state, and
all rates, taxes or public charges (if any) being paid by the tenant.”

Republic of Ireland
1.8

Under the provisions of Part 2 of the Valuation Act 2001, Section 48(3), net
annual value is defined as follows:
“Subject to section 50, for the purposes of this Act, “net annual value”
means, in relation to a property, the rent for which, one year with
another, the property might, in its actual state, be reasonably expected
to let from year to year, on the assumption that the probable average
annual cost of repairs, insurance and other expenses (if any) that would be
necessary to maintain the property in that state, and all rates and other
taxes and charges (if any) payable by or under any enactment in
respect of the property, are borne by the tenant.”
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Section 50 refers to the use of the Contractors Method and states that net
annual value “shall be an amount equal to 5 per cent of the aggregate of
the replacement cost, depreciated where appropriate …”
Method of Rental Adjustment
1.9

There are four methods of analysis outlined in the RICS Red Book: ‘Straight
Line’, ‘Time Value’, ‘Investment Value’ and ‘Discounted Cash Flow’.

1.10

‘Time Value’ reflects the time-value of cash flow (rent) utilising a discounting
yield and is the most appropriate method for non domestic rating valuation.

It is necessary to note that in some cases the rent passing may relate to
property that is larger or smaller than a particular entry in the list or roll. In all
cases the analysis should reflect the actual property as let and where
significant adjustments are required the resultant answer should be treated
with appropriate caution. The most common situations where the rent will
need adjustment are as follows:

Domestic Use
2.2

That part of the rent paid which is attributable to the domestic portion should
be deducted from the overall rent. The amount to be deducted should be
based on local market evidence and reflect the fact that the domestic
accommodation is part of a larger non-domestic property.

Agricultural and Other Non Rateable Use
2.3

The amount of rent applicable to any part of property, which is not a rateable
subject or is exempt, should be deducted from the rent.

Extensions and Alterations
2.4

Where the tenant has carried out extensions or alterations, the rent paid may
only relate to part of that larger property, or for the site only. An adjustment
will be necessary to ensure that any analysis relates only to the part actually
rented or the premises as demised.

Where Rent Includes More Than One Property
2.5

A rent may include more than one property. In such cases this should be
noted and consideration given to whether a quantum discount, or other
factors, may have been applied in setting the rent.

Where the Property Has Been Subject to a Subletting
2.6

In this instance the rent may relate to a property which is larger or smaller
than the entry in the ‘list’ or ‘roll’ and should be adjusted to reflect the
property as let, or demised.

The basis upon which rents are paid varies considerably and consequently
the reliability of those rents as indicators of rateable value also varies. A
thorough knowledge of local market conditions at the relevant valuation date
is important, for example, the current economic climate has resulted in more
flexible leasing arrangements. The most common types of rents to be
considered are as follows:

Rents on New Lettings
3.2

These rents can be considered the most reliable form of evidence providing
they are open market lettings with vacant possession between willing parties
and with a current normal review pattern.

3.3

Care will still need to be exercised in certain circumstances. For example, in
the case of shopping centres the rent agreed on some of the new units may
be set at a level designed to attract an ‘anchor tenant’ and the rent paid
should be examined to discover if:
i.

the rents were agreed before other lettings in the development. If so the
rents may require adjustment to bring them into line with other rents
agreed when the development was completed or near completion; or

ii.

there are other rents paid by similar tenants. These should be
considered to determine whether an overall pattern exists which could
be adopted; or

iii. it is important to establish whether the rent relates to the property in a
shell condition or fully fitted out.
Rental evidence from new lettings should be considered in conjunction with
evidence from other types of rents described below.
Rents on Lease Renewals
3.4

These rents are paid when a lease has been renewed. Where the basis of
renewal is open market rental value, assuming vacant possession and a
current normal review pattern, then the rent can be regarded as reliable
evidence.

3.5

If the lease provides for renewal it is important to ascertain whether there are
any improvements or alterations carried out by the tenant, the value of which
is to be disregarded under any relevant landlord and tenant legislation, in
setting the rent upon renewal of the lease.

Where a rent has been reviewed during the course of a lease it is essential
that the precise terms upon which the rent was fixed are carefully examined.
Where the basis of review is open market rental value, assuming vacant
possession and a current normal review pattern, then the rent can be
regarded as reliable evidence.

3.7

Abated Rents – the rent agreed may be abated on review, see paragraph
8.8 below.

3.8

Formula Rents – If the reviewed rent is fixed by formula agreed at the
commencement of the lease the reviewed rent may not be equivalent to
open market rent.

3.9

Upward only reviews – Where the terms of the lease permit upward review
only and there has been little growth, or in fact a fall in rental levels, the rent
passing may be in excess of open market rent.

Stepped Rents and Geared Rents
3.10

‘Stepped Rent’ – This is where a lease provides for increases (or
decreases) in rent to fixed sums at specified future dates. In these cases it
is possible that the stepped rent may not represent open market rental value
at that time.

3.11

‘Geared Rent’ – Where the lease provides for the rent to be assessed on a
percentage of open market value the rent may be of use. Highly geared
rents will be the most helpful whereas rents which represent a small fraction
of full rental value should be treated with caution (see ‘turnover rents’ below).

These rents although useful should be treated with appropriate caution. An
independent expert employs his own knowledge; conversely an arbitrator is
obliged to determine a rent based only on the evidence presented, though
he/she must use his/her expert knowledge to evaluate the evidence
produced.

Sale and Leaseback
3.13

Sale and leaseback arrangements become an attractive option where there
is limited availability of finance in the market place. In recent years sale and
leaseback transactions have become an established part of many
investment markets.

3.14

It has traditionally been considered that the rents paid under such
agreements are of limited value. This is because the leaseback transaction
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was considered a funding operation, with the initial rent geared to the
strength of covenant of the tenant rather than the strength of the property
market.
3.15

Pension funds, however, are now required to ensure that leases are at full
rental value. In addition many reviewed rents under these agreements are
assessed at full rental value under the terms of the lease. Rents determined
on this basis are obviously more useful.

3.16

In general, evidence from sale and leaseback transactions should be treated
with caution. If possible a copy of the lease should be obtained in order to
establish the true nature of the arrangement and weight, if any, to be
attached to the rent.

Licences
3.17

These agreements are generally short term in nature and do not confer the
same control and/or security of tenure provided in a lease. In all cases the
particular terms of the agreement should be examined closely to ascertain
exactly what rights are conveyed to the occupier.

3.18

However, in some cases, such as street trading or pavement seating, the
only form of letting is by way of licences, and this may be the only rental
evidence available.

It will be necessary at the outset to establish the current standard lease
length and review pattern for the particular type of property being considered
at the valuation date.

4.2

Traditionally the majority of leases in respect of non-domestic properties
were for terms of between five and twenty-five years with rent review periods
generally ranging between three and five years. It is generally accepted with
these leases that no adjustment is required to bring the rent into line with the
rating hypothesis, which assumes a tenancy for year to year with a
reasonable prospect of continuance.

4.3

Where there is a longer period between reviews than would generally be the
case for the class of property involved, a landlord would normally require the
compensation of a higher rent. It may therefore be necessary to make a
downward adjustment to reflect what is commonly known as ‘overage’.

4.4

In making an adjustment the normal rent review pattern for the class of
property involved should first be established. The adjustment made should
take account of the rate of property price inflation together with an
appropriate equated yield.

4.5

As this information may not be available a general adjustment of 1% per
annum for every year in excess of a 5 year review pattern has traditionally
been used. However, this adjustment is not universally accepted and may
not be appropriate in the current recessionary conditions. In any event it
should be used with caution or amended to suit local market conditions.

The hypothetical tenancy is deemed to be net of VAT. It should be confirmed
whether the rent returned is exclusive of VAT. If inclusive then the tax
should be deducted at the prevailing rate at the date the rent was paid.

5.2

In markets where the majority of property occupiers are able to recover VAT,
the imposition or otherwise, of VAT on rent is unlikely to have an effect on
open market rental values.

Service Charges
5.3

Where the lease provides that the landlord can recover the cost of services
by way of a separate service charge then no adjustment to the rent is
necessary. Where the rent includes a service charge it will require
adjustment.

5.4

The effect of an abnormally high or low service charge may make the rent
unreliable as evidence of rateable value. It may be appropriate to treat any
exceptional profit made by the landlord on the service charge as being in the
nature of rent and add it to the rent passing.

Rates
5.5

The hypothetical tenancy does not include rates and the terms of most
leases usually provide that the rent passing is exclusive of rates. In
circumstances where the lease provides that the rent is inclusive of rates,
the rent should be adjusted accordingly.

5.6

Where government reliefs or levies exist in the market, especially in regard
to the payment of rates, care should be exercised in the analysis of rental
information. Recent empirical evidence indicates that local tax incentives
are translated into higher rents for the properties involved. In many instances
this can be as much as 100%. (The impact of enterprise zone tax incentives
on local property markets in England: who actually benefits? Shaun A.
Bond, Ben Gardiner & Peter Tyler)

5.7

Where there is evidence that the rental level for particular properties may
have been distorted by rates reliefs or levies, the rents in question should be
carefully considered in relation to:
i.

The statutory definition of the hypothetical tenancy and any relevant
case law, and whether such relief or levies would be available to the
hypothetical tenant; and

The degree of permanence of the relief or levy and whether or not it
should be considered temporary in nature at the valuation date.

Insurance
5.8

The hypothetical tenant is assumed to be responsible for insuring the
property under the statutory definition of rateable value.

5.9

Where, under the terms of the lease, responsibility for the insurance will be
undertaken by the landlord and the cost recovered from the tenant, no
further adjustment is required.

5.10

Where the landlord insures without directly recovering the premium a
specific reduction will be required. As premiums vary widely according to
use, construction, age and location it is not possible to provide specific
guidance which would cover all possible cases that could occur.

5.11

If an adjustment is required regard should be had in the first instance to the
actual annual level of insurance premiums for the property under analysis
together with other relevant comparables. In the absence of actual
insurance premium rates percentage adjustments are commonly used and
these will obviously vary by locality, property type and age etc. Any
percentage adjustment adopted however should, preferably, be evidence
based and is likely to range between 2.5% and 6%.

Repairs
5.12

The hypothetical tenant is responsible for ongoing repairs to the property.
The standard of repair assumed for a rating valuation should have regard to
the type and age of the property, its locality and the nature of the tenant
likely to occupy it.

5.13

It will be necessary at the outset to determine who is responsible for the cost
of repairs under the terms of the lease:
i.

Where the landlord carries out the repairs and recoups the cost from
the tenant no adjustment to the rent is required because, in reality, the
tenant is bearing the cost. This would be common where the building is
let in parts or the letting comprises part of a larger development, for
example, a shopping centre.

ii.

If the landlord carries out some or all of the repairs without a separate
charge to the tenant (now comparatively rare) the rent will be higher
than if the tenant was responsible for the full cost of maintaining the
property and an adjustment will be required.

Where an adjustment is required, in the first instance, the actual annual
average repair costs should be obtained. Where these are not available
estimates may be made on the basis of market evidence for similar
properties and available cost guides, taking account of age and construction
of the building and any abnormal repair costs that may be envisaged.

5.15

In practice adjustments of between 3% and 7% are typically made for
external repairs and a further 1% to 6% for internal repairs. While these
adjustments are generally acceptable they should only be used where they
are consistent with market evidence and practice.

5.16

Where the premises are in a poor state of repair the landlord in the real
world may choose to either:
i.

Put the premises in reasonable repair prior to letting. As the premises
will be repaired on letting no adjustment to the rent will be necessary;
or

ii.

Let the premises, with an agreed record of condition, with the tenant
under no liability to give up the premises in a better state than that
recorded at the commencement of the letting. In this case the rent is
likely to be discounted to reflect the poor state of repair. In order to use
such a rent as a comparable for a rating valuation an adjustment may
be needed to bring it to the equivalent of the likely rent if the property
was in reasonable repair; or

iii.

Let the premises in their existing state, on FRI terms, with the tenant as
a condition of the lease undertaking to repair the premises. In these
circumstances the initial rent will be reduced to reflect the tenant’s
liability to put the property into the agreed state of repair. The rent will
need to be adjusted as in (ii) above.

There are many reasons why a landlord may seek to offer an inducement as
part of a rental transaction. These include the ability to maximise the capital
value of his investment, the ability to secure funding at a more favourable
rate and the benefit of securing a longer lease than would normally be the
case. Furthermore an agreed headline rental, when coupled with an
upwards only rent review clause, may secure a rental income in excess of
the open market rental value of the property for a period exceeding the first
or even second reviews.

6.3

For a tenant a rent free period, reverse premium or contribution towards
fitting out made in return for a higher headline rent is effectively a form of
unsecured borrowing.

6.4

It is important when considering incentives to understand the reasons why
they have been agreed and the extent to which (if at all) they drove the
transaction. This will help the valuer reach a decision as to whether any
adjustment should be made to reflect the incentive, the means by which it
should be calculated and the weight given to the resultant figure.

6.5

Given that an incentive affects the rent, consideration needs to be given to
the rate and period of amortisation of the incentive.

Rate of Amortisation
6.6

The rate used will vary according to the class of property and the location. It
should be the market rate expected for such an investment as at the date of
the lease derived from local evidence and applied on a single rate basis.

Period of Amortisation
6.7

From the landlords point of view the incentive is often regarded as a ‘one off’
payment with the costs amortised over the full length of the lease. The
tenant will generally argue that the effect of the incentive should be
discounted over the period to the first review because the rent is then subject
to review, normally to open market value. In practice the possibilities are as
follows:
i.

The whole term of the lease is taken. This will apply where, on
balance, it is considered that the primary motivation behind the
incentive is to lock the tenant into a lease for a longer period of time
than would normally be the case. An example of this would be where
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an inducement has been made to a high quality anchor tenant whose
presence is assumed to bring a benefit to the development for the
duration of the lease.

6.8

ii.

The period to the tenant’s break clause. In this case the period
during which the tenant is ‘locked in’ is reduced. Before this is applied
care should be taken to ascertain whether or not there is a realistic
possibility that the break clause will be exercised. The effect of the
break clause may be significantly weakened by the inability of the
tenant to find alternative premises, the need to write off ‘fit out’ costs
over a short period or prohibitive penalty charges.

iii.

The period to first review. This may be applicable where the first
review is to full rental value. This approach can often produce a low
effective rent however and it will be necessary to consider it against the
totality of evidence available when deciding the weight to be attached
to it. If the resultant rent is out of line with other non adjusted rents the
period of amortisation is probably too short.

iv.

The period to review or break following the point where the market
rent overtakes the headline rent. This is often particularly difficult to
calculate, as the current market rent, which is what is being sought, is
not known. Where this approach is considered appropriate, market
practice appears to have settled on a rule of thumb approach by
analysing incentives over a ten year period, or to the second review.
Where this approach is used a further adjustment for ‘overage’ may be
required to reflect a more normal five year review pattern.

In summary the period of amortisation must remain variable in order to
reflect the different circumstances which pertain to a particular letting. The
correct period will ultimately be a question of judgement based on such
factors as; the type of incentive, projected short to medium term rental
growth, the timing and the likelihood of exercising break clauses, the terms
of the rent review and local market conditions. In any event, the adjusted
rent or a range thereof should where possible be tested against rents which
provide more direct and reliable evidence.

Rent Free Periods
6.9

Periods of three months are commonly granted by landlords to allow tenants
to fit out the property for their own occupation. No adjustment should be
made for this period as the concession is only given to allow the tenant to
complete works which, under the rating hypothesis, have already been
carried out within the principal of ‘rebus sic stantibus’.

Only rent free periods in excess of the time reasonably required to fit the
property out should be taken into account as a true incentive.

6.11

The normal approach is to calculate the present value of the actual rent
received over the period to review/end of lease and then take an annual
equivalent over that same period. The yield adopted should be in line with
the market for the type of interest and category of property involved, see 6.6
above. The appropriate time period over which to base the analysis may
typically be based upon the point where the market rent overtakes the
headline rent, but will depend upon the individual circumstances of the
letting, see 6.7 above.

Stepped Rents
6.12

Where a lease provides increases (or decreases) in rent to fixed sums at
specified future dates, such payments are referred to as stepped rents. The
adjustment to a constant rent is made by calculating the present value of the
stepped rents and then taking an annual equivalent over the relevant period.
The yield used and relevant period will be as at 6.6 and 6.7 above.

6.13

If the time period used for the analysis is to the first review and the
equivalent rent needs to grow by an unrealistic percentage to equal the final
step, consideration should be given to analysing over a ten year period or to
the second review except where there is a reasonably operable prior break
clause.

Reverse Premiums
6.14

Where a landlord makes a capital payment to a tenant as consideration for
taking a lease, such a payment is known as a ‘reverse premium’.
Expenditure by the tenant on fitting out or in providing rateable fixtures and
fittings should be offset against the payment and the balance considered an
incentive.

6.15

The capital sum can be deducted directly (discounted to present value if
necessary) from the value of the rental flow. Alternatively since it is a capital
payment given to the tenant that can be used to pay rent, it can be treated
as a rent free period.

Contributions to Fitting Out
6.16

Where a landlord makes a contribution towards the tenant’s fit out costs it is
necessary to distinguish between contributions to expenditure which form
part of the rateable property and those which are for non rateable fixtures
and fittings.

The landlord’s capital contribution towards the cost of the tenant’s rateable fit
out should be offset against the cost of the works. If the landlord contributed
the entire amount the rent should be treated as reflecting the fit out. If the
contribution exceeds the realistic cost of the fit out the balance should be
treated as a reverse premium as outlined above at 6.14.

Assumption of Liabilities
6.18

The landlord may assume the liabilities of a tenant in respect of property
previously occupied.

6.19

In this case it will be necessary to estimate the value of the liability
transferred. This will normally include such items as rent, rates and service
charges for the period until a new tenant is found. It may also include an
amount in respect of dilapidations at expiry of the lease. In addition it will
also involve consideration of the expected rental growth over the short to
medium term.

6.20

Once the total cost and the time period over which the liability will be
incurred has been quantified, it can be deducted from the value of the rental
flow or alternatively treated as a rent free period as previously outlined.

6.21

Due to the highly speculative nature of events likely to occur where the
landlord assumes a liability on behalf of the tenant, care needs to be
exercised when analysing such an incentive.

Where a tenant takes a property in a poor state of repair and as a condition
of the lease puts the property into a specified state of repair, the rent paid at
the commencement of the lease will normally reflect the original poor state of
the building. The rental value passing will therefore need to be adjusted to
reflect the improved repair. Depending on the lease terms the cost of the
repairs can be amortised over the entire term of the lease, or to the first rent
review (if that review is to the open market value of the improved building) or
break clause (see 6.7 above).

Tenant’s Improvements, Extensions and Alterations
7.2

These works should be taken into account to the extent that they increase
the rental value of the property.

7.3

Generally more weight should be placed on rents paid disregarding
improvements and relating to the unimproved building. The more significant
the adjustment made, the less reliable the rent becomes.

7.4

If possible the value of tenant’s improvements should be ascertained by
direct comparison. Where this is not possible the cost of the works should
be amortised over a period which has regard to the useful life of the
improvements, the terms of the lease and the general recommendations at
6.7 above.

Tenant’s Fit Out
7.5

It is common for new shops and offices to be let in ‘shell’ condition with the
tenant responsible for ‘fitting out’ the property. The initial rent and possibly
any reviewed rent will reflect the shell condition and not the fitted unit. Where
this is the case an adjustment will be required.

7.6

Where the ‘fit out’ is to a new building the adjustment will be made by
calculating an annual equivalent of the rateable fit out costs over the
appropriate term and adding it to the rent passing. Where the adjustment is
being applied to a review rent when the ‘fit out’ took place at the
commencement of the lease the cost should be depreciated. The rate of
depreciation to be used will vary depending on individual circumstances but
one ‘rule of thumb’ commonly used is 5% per annum from year six to year
twenty-five on a straight line basis.

7.7

Expenditure on fitting out is likely to vary considerably. Care should be taken
to ensure that expenditure on corporate features which are of no market
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value is not included in total cost. In addition the cost of tenant’s non
rateable fixtures and fittings should be also excluded.
7.8

Where existing buildings are refitted to an improved standard an adjustment
should be made as above. Where an existing building is refitted to the same
or a similar standard to portray a new ‘corporate image’ no adjustment
should be made but, of course, no depreciation allowance will be made as
the fit out is now new.

7.9

Where a previous tenant has assigned the interest, the residual value of the
improvements may be taken into account in line with the principles for
treating current tenant’s improvements as set out above.

Premiums
7.10

A premium is generally regarded as a capital sum paid by a lessee to a
lessor (or previous lessee) in consideration of the rent passing being fixed at
a level below the full rental value of a property. In effect, it can be
understood as the tenant purchasing a profit rent.

7.11

In practice a premium can be made up of one, or a combination, of the
following:
i.

vi. key money.
Items (i-iii) should be excluded from the sum to be amortised, item (iv)
included if analysing against the improved property, items (v) and (vi) should
be included in the sum to be amortised.
7.12

Where the premium has been adjusted to reflect only capitalised profit rent it
should be amortised over the period to first review, or renewal, where the
basis is to open market rental value.

7.13

Where the premium has been adjusted and contains both profit rent and key
money, the amount attributable to each element should be identified. The
profit rent should be amortised to first review as above (7.14). It may be
appropriate to amortise the amount attributable to key money over the
expected occupancy of the tenant, a period which may extend beyond the
length of the lease.
Steering Committee on Harmonisation (Practice & Procedure)
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7.14

Rental evidence involving premiums, especially large premiums, should be
treated with caution. Where the premium is amortised over the period to first
review the virtual rent may be very high and unsupported by other market
evidence. This may suggest the period used for the analysis is incorrect.

7.15

While it will be necessary to consider the resultant rent in the light of all the
evidence available, it should not merely be dismissed as it may provide an
insight into the demand for, and the value of, a particular property or group of
properties.

Turnover rents occur where the rent payable is determined, in part at least,
by the actual turnover achieved by the tenant. They are typically used in
retail premises with catering leases and franchises; food courts, concessions
within department stores and factory outlet retailing. Although turnover rents
are not new they are becoming increasingly common due in part to the
current economic climate encouraging more flexible leasing arrangements.

8.2

There are two principal types of turnover based lease:
i.

where rent is wholly based upon turnover, commonly employed in food
courts; and

ii.

where the rent is based on turnover combined with a minimum base
rent.

8.3

The base rent is generally determined as a percentage of open market rental
value or a price per square metre. Base rent is often in the region of 70%80% of open market rent and the turnover percentages normally range
between 5%-15%. Alternatively a lower base rent may be agreed combined
with a higher percentage of the tenant’s turnover.

8.4

Turnover figures in shopping centres are obtained by direct reference to
receipts otherwise provision is made in the lease for regular statements and
turnover certificates from the tenant’s accountant. The figures obtained are
subject to deductions in respect of VAT, sales to staff and returned goods.
Specific reductions may also be given where there are high proportions of
credit card sales to reflect the charges made by credit card companies.

8.5

Care should be exercised where there is a mix of turnover leases and
traditional leases within one development. This can arise through one or a
combination of the following circumstances:
i.

the landlord’s policy;

ii.

the refusal of some retailers to enter into turnover leases; or

iii.

where the rent cannot be easily related to turnover for a particular
occupier, for instance a travel agent.

Clearly identifying those properties let on turnover rents will ensure that base
rents are not adopted as being full rental value and leases where a full open
market rent is paid are not grossed up further.
Steering Committee on Harmonisation (Practice & Procedure)
England / Wales, Scotland, Northern Ireland & Republic of Ireland

8.6

Where the lease provides for a turnover rent with a base rent geared to open
market rental value, the most reliable route to rateable value will be to gross
up the geared rent paid. Base rents at or about the valuation date should be
used. Obviously the lower the gearing the less weight should be attached to
the grossed up rent. Where possible, grossed up rents should be tested
against rents for similar properties which have been let at open market value
in the same development to gauge reliability.

8.7

Where base rents are not geared to open market rental value close to the
valuation date regard should be had in the first instance to the levels of rents
actually paid. These rents can be analysed to give an initial indication of
what might be paid for the properties on the statutory terms. If the analysis
is distorted by a small number of very high or very low rents these rents may
need to be excluded. Rental analysis should ideally focus, where possible,
on at least three years around the valuation date in order to identify any
trends which may need to be taken into account.

Abated Rents
8.8

In the current recessionary climate many tenants are renegotiating their
rents between reviews and obtaining reduced or abated rents for varying
periods of time. In the absence of other rental evidence, abated rents
represent some evidence and they will have been agreed by a specific
existing tenant and are not as such truly open market rent. Any abated rent
used should have been in place at the valuation date and be for a period of
at least one year. They should be treated with suitable caution and always
considered in relation to other comparable rental evidence where it exists. A
full understanding of the circumstances including any back letters/side
agreements is critical.

Order of Adjustment
8.9

There are no set rules governing the order of adjustment other than the
adjustment for repairs should be made last (F W Woolworth and Co. v Peck
VO 1967 LT RA 365)

8.10

The VOA and the VO Ireland have adopted a consistent approach to the
order of adjustment as shown below:
i.

There is no single correct approach to adjustment of rents and methods may
vary depending on the circumstances of individual cases and market
practices in different areas and sectors. In addition, changing markets may
mean that an approach adopted previously may not be appropriate several
years later.

9.2

It is also worth repeating that even where a property is let on terms similar to
the definition of rateable value, it will still be necessary to have regard to
other open market rental evidence. This recognises the fact that actual rents
are the product of individual negotiations, the outcome of which may be
influenced by a variety of factors. It is necessary to look at the totality of
rental evidence to form a view as to the general level of rental value for the
type of property concerned within a particular locality.

9.3

Rents vary greatly in their reliability and it is essential that all rents are
carefully considered before identifying those which will be relied upon to
create a valuation list or roll. As a general rule the more adjustment that is
required, the less reliable the rent will be.

9.4

Skill, care and a sound knowledge of local property markets are required in
the approach to rental adjustment. Through this, a proper understanding of
the transaction being analysed, the intentions of the parties involved and the
true value of costs or incentives concerned can be obtained before
proceeding to the mathematical adjustment.